The one constant thing with retail is… change. Understanding change and its impact on business assets allows us to secure business asset financing today. Ever-changing commercial buildings demand attention to detail, from tenant mix to occupancy costs, rents, lease terms, co-tenancy and termination rights. These factors affect the actual guaranteed net profit and the valuation which provides the calculated loan parameters for each asset. What has changed in retail financing?
We have seen a secular shift from the period between 2017 and 2020, often referred to as the “retail apocalypse” when many lenders shunned retail lending opportunities, to today lenders entering into loans for retail assets beyond just “best in class”. “Properties rooted in groceries. As retail returned to favor, available debt expanded from primarily CMBS and recourse bank loans to include insurance companies, non-recourse bank loans and debt funds. , each meeting the different financing needs of the borrower.
While many commercial property owners often want a 10-year fixed rate loan, today’s interest rates are higher than those seen for many years, leading borrowers to seek shorter-term loans. to “fill the gap” of uncertainty in the market. With higher interest rates, borrowers should focus on debt service coverage ratios rather than debt yield, as DSCR can be the limiting factor on maximum loan size. A client recently called a large variable rate loan “a band aid until the market stabilizes and figures out what it wants to be.” It’s an interesting take on today’s chaotic market.
This leads to interest rates and prices. At the beginning of 2022, it was very common to get an interest rate of 2.5% to 3.5% fixed for 10 years with part or all of the interest period only for a sale asset at the detail. Compared to multi-family and industrial properties, these interest rates of over 3% were “high”, providing a good return for some lenders who were balancing the returns on their loan portfolio. Today, many lenders don’t know where or how to price loans, not just for individuals, but for all asset classes. Two things: (1) Whatever the interest rate, if the deal works, lock in the rate, close the loan, and don’t look back because loan repayments can be made; and (2) You know your interest rate when your loan is fully closed/sold, because until then rates are generally subject to change for most lenders (except insurance companies). insurance that lock in the demand rate). Where are today’s retail rates? It changes daily, but they are mostly higher than corporate bond rates.
The underwriting trend around risk continues to be a requirement for many lenders. This involves establishing escrows not only for property taxes and insurance – which in some cases revert to requirements on basic loans – but also based on major tenant lease expirations, co-location, expenses capital costs (based on age of roofs, parking lots, etc.) and future tenant improvement costs and rental commissions. Many of these escrows now require a deposit at closing and ongoing funding at some point during the life of the loan, whereas this had not been a requirement for many lenders in major markets for the past three years. . Given the number of escrow accounts, setting caps on escrow accounts has an impact on returns to owners/borrowers.
Transaction size matters because the definition of “large loan” has changed from “over $100 million” to any loan over $50 million or $75 million. Today, fewer lenders can compete for large loans, requiring two or more lenders to participate in lending for the largest assets.
Knowing about lenders and their limitations affects the ability to place retail debt today. Major monetary central banks usually stay out of the market due to credit, risk and/or regulatory issues. As is often the case. insurance companies are hitting their annual allocations, but their ability to provide fixed interest rates for loans to close in 2023 allows them to remain a competitive funding source. This situation allowed smaller regional, local and community banks to attract customers and compete effectively for loans that were too competitively priced to meet their lending needs.
With all of this uncertainty, strong sponsorship and location remain key factors in seeking loans for retail assets today. The tenants will change. Therefore, providing a lender with the ability of sponsorship to find the right replacement tenant based on their experience and financial strength weighs even more heavily in securing personal loans today.
Over the past six months, we have closed loans on department store boxes, grocery anchored retail, malls, lifestyle centers, electrical, outdoor, neighborhood and community, and single-tenant retail properties simply by knowing and understanding the ever-changing retail business. lending environment.
Claudia Steeb is Senior Managing Director, JLL Capital Marketsand John Marshall is Senior Director, JLL Capital Markets.